This is NOT an investment advice. Please make your own decision, as blindly acting on anyone else’s

research and opinions can be injurious to your wealth. I am not a SEBI registered Research Analyst.

Market Cap: Rs. 1350 Cr

CMP: Rs. 117

Business Snapshot

• Garden Reach Shipbuilders and Engineers (GRSE) is a shipbuilding company primarily adhering to the shipbuilding requirements of the Indian Navy and the Indian Coast Guard

• •Incorporated in 1934, and was acquired by the Government of India from Macneill& Barry Limited in May 1960

• •Conferred with status of Schedule B & Mini Ratna-Category I Company in September 2006

• •Business Divisions:

• •Shipbuilding: construction of vessels for clients engaged in the defence sector. GRSE has built and supplied more than 750 vessels for maritime security.

• •Engineering: develops & manufactures portable steel bridges, suspension type pre-fabricated steel bridges, marine pumps, rail-less helicopter traversing systems, boat davits, anchors, mooring and dock capstans, anchor windlass and winches

• •Engine Production: undertakes assembly, testing, servicing and repair of various models of diesel engines used for marine propulsion and power generation through collaboration with the MTU of Germany

Pioneer in Indian Shipbuilding

Built India’s first indigenous warship–the INS Ajay, in the year 1961

✓FirstIndian shipyard to build and deliver:

oFleet tankerto the Indian Navy

oHovercraftto the Indian Coast Guard

oLanding shipto the Indian Navy

✓First Indian shipyard to export a warship to the Government of Mauritius

✓First Indian shipyard to integrate carbon composite superstructurewith steel hull for the ASW Corvette

✓Pioneered manufacture of portable steel bridgesinIndia.

✓Developed first Indian Marine Sewage Treatment plant

✓Kamorta Class Frigates built with 90% indigenous components

End to End Solution Provider

GRSE has a dedicated Central Design Office (“CDO”) undertaking design, research and development •Comprises of highly skilled workforce of seventy-four (74) members•Specialized software from Aveva Marine, NAPA for Naval Architectural design to AutoCAD for drafting work used, among others has enabled GRSE to achieve innovative measures in carrying out complex warship designs work.•Landing craft utility mark IV, which is an in-house design product with 15 knots speed -unique for a vessel of this size and type •Designing allows better understanding and greater control of the manufacturing process.

Engineering and Engine Division

Growth Triggers

1) Strong & Established Relationships with Indian Navy and Coast Guard

• Five decades long relationship with Indian Navy beginning with delivery of INS Ajay in 1961.

• Delivered over 96 ships to Indian Navy, Indian Coast Guard & Government of Maldives on aggregate basis

• Historically delivered first of its kind vessels by an indigenous shipbuilder including fleet tanker and hovercraft

• Built 12 ships in FY13 –FY17 for the Indian Navy and Indian Coast Guard (6 ships each).

• Built & delivered warships with completed weapon and sensors trials for the first time in 2017.

• Built & delivered the INS Kiltan, an anti-submarine warfare stealth corvette and the first Indian warship with a superstructure made entirely of composite material.

2) Pursuing new market opportunities through exports

• It exported first ship in 2014 and seeks to grow sales from ship exports substantially.

• It intends to market all vessel sizes for exportation in various geographic locations.

• However, company is expected to ramp up its export of small and medium sized warship and patrol vessels to South-East Asia, West Asia, African countries and Latin America.

• GRSE is poised to supply vessels of improved quality while incurring a lesser capital cost in building ships to compete in the global arena.

Investment Case

7) EBITDA margin turnaround in FY19 • GRSE reported a consistent increase in sales and

profitability over FY11- 16 led by few large order wins.However, during FY17, sales declined by 44% due to delay in execution of few projects as Indian Navy made unplanned changes in design and technology.

• GRSE also made significant provisions towards liquidated damages during FY17 and FY18 respectively. Hence profitability of GRSE got impacted very badly in FY17.

• In FY19, GRSE delivered 20% growth in sales with core EBITDA margins of 3% (vs -1.1% in FY18) led by reduction in provisioning towards liquidated damages.

• Going ahead, chances of these LD provisions occurrence likely to go down as GRSE has shifted its shipbuilding from sequential to modular construction methodology.

Investment Case3) Cash rich balance sheet: While private sector shipyards like Reliance Defence, ABG Shipyard and Bharti Shipyard are reeling under high debt, GRSE is cash surplus and has cash and cash equivalent balance of ~Rs. 2,000 Cr.4) Negative working capital : Healthy increase in order inflows resulted in proportionate increase in stage payments received for these orders, thus resulting in negative working capital cycle. 5) Capex: GRSE plans to spend ~Rs250 Cr. in next 3 to 4 years mainly on account of modernization of existing ship building facilities at RBD and other units to enhance the capabilities of ships constructions / block fabrication etc. 6) Healthy dividend yield: Company has announced dividend of Rs6.95/share in FY19, implying a healthy dividend yield of 5.8%.

8) Strong Order Book

Total Order book of ~28,000 Cr comprises of the following vessels:

9) Financials

*During FY 19 the company did PBT Rs. 178 Cr, out of that major component from interest income of float. With a robust order book to be executed, we expect the operating numbers to improve going forward and interest income will be icing on the cake thereafter.

10) Tailwinds for Domestic DefenceShipbuilders

Key Investment Risks✓ Given, the long execution cycle of the contracts any adverse movement in the costs brings a risk to profitability.

✓ Increased competition due to opening of defence shipbuilding to private sector.

✓ Delay in execution of P17A project. ✓ Abrupt changes in government's policies regarding stage payment & nomination based bidding.

View: Available near book value, with such a robust order book, improving margins, high dividend yield and negative working capital, GRSE is a potential multi bagger with 2-3 years horizon.

This is NOT an investment advice. Please make your own decision, as blindly acting on anyone else’s

research and opinions can be injurious to your wealth. I am not a SEBI registered Research Analyst.